Individuals may have singular needs, but past history and a few surveys show many retirees have a few common ones, too. Here’s a look at two of them.

HEALTHCARE

Challenge: Most estimates put the cost of healthcare in retirement in the six-figure range. This isn’t as surprising as you might first think, considering soaring healthcare costs — even with insurance — and the likelihood of illness and injury as we age.

Solution: Prepare for this expense by having the right insurance, including Medicare Parts A, B and D once you reach age 65, unless you are covered by an employer-sponsored health plan. Part A covers hospital insurance, Part B covers outpatient health expenses and Part D is prescription drug coverage. You can combine all of these through Medicare Advantage plans or buy supplemental Medicare from an insurer to cover deductibles and other potential expenses.

TAXES

Challenge: Taxes can deplete your disposable income unless you know what to expect.

Solution: There are varied ways to limit the impact of taxes. Consider tax-free withdrawals from a Roth IRA. Invest to keep up with inflation and changes in your tax picture. Also make sure you don’t run afoul of minimum distribution rules, which apply to most retirement vehicles but not to the Roth. Move or downsize if property taxes are too high.

Did you know there are changes to the Meals & Entertainment Rules for business?

Under the new TCJA tax law, entertainment, amusement, or recreation expenses for clients and business associates are no longer allowed as a business deduction?

Overview

The TCJA has changed the rules for deductions relating to entertainment expenses for clients. Starting January 1, 2018 entertainment, amusement, or recreation expenses for clients and business associates will no longer be a deductible expense. For example, monies spent to bring a client to a sporting event, concert, golf outing, etc. are no longer deductible, although the food and beverage costs that are separately stated from the entertainment are still entitled to the 50% deduction. The TCJA did not change the rule relating to expenses for recreational activitiesprimarily for the benefit of their employees (i.e. Holiday parties, annual picnic, etc.). These expenses are exempt from the entertainment disallowance rules, and are still 100% deductible. The rules regarding business meals are unchanged as well, and are still entitled to the 50% deduction. Because of this change in the law, there is now a great need to track meals separate from entertainment on your chart of accounts. The generic “Meals & Entertainment” account will now need to be broken out in order to receive the correct deduction.

No one likes to lose money, but the good news is that certain investment losses may be tax-deductible, so this is a good time of year to get an idea about how your investments are performing.

KNOW THE DIFFERENCE

Not all investment losses qualify for a federal tax deduction. First, you realize a capital gain or loss only by selling the investment. A paper loss on an investment that you continue to hold is not considered a loss for tax purposes, just as a paper gain isn’t a taxable event until you realize gains by selling the investment.

When you realize investment losses, offset them with investment gains. For example, let’s say you sell some investment losers for a $5,000 loss in 2018. You know this by subtracting what you sold the investment for from what you paid for it, called the basis. Then you sell a few winning investments that give you $4,000 in taxable gains. Subtract your loss from your gain, and you get a total loss, in this case, of $1,000.

CAP GAINS LIMIT

Not all capital gains and losses are treated the same. Long-term capital gains are on investments you hold for at least a year, while short-term investment results are realized when you sell an investment you owned for a shorter time period.

You also need to be aware of the annual $3,000 capital loss deduction limit. Losses over this amount may be carried forward to the next year’s tax return.

BE CAREFUL

Work with your accounting professional to make sure you can take advantage of tax-loss harvesting, as well as any other tax break the IRS offers. Also, some investments that are temporary losers may become long-term winners, so keep your long-term investing goals in mind before deciding whether to sell any investment.

Income Tax Changes 2018 and Beyond

While most taxpayers are now aware of lower federal tax brackets and other changes in the Tax Cuts and Jobs Act of 2017, some may be unaware of less publicized provisions of the new law. These tax changes feature a little goods news, and a bit of bad news.

BAD NEWS

Bad news first. Previously, you could deduct a variety of miscellaneous itemized expenses if they were more than 2% of your adjusted gross income. This provision is gone, which is bad news for people who spend significant money on uniforms, professional development and anything else job-related that employers don’t reimburse. Teachers, though, at least get to keep a $250 deduction for classroom and development expenses.

Other deductions that are gone include advisory fees, tax preparation costs and job search expenses. Also significant for homeowners in high-tax states is how much they may deduct annually for state, local, sales and real estate taxes. The limit is $10,000.

GOOD NEWS

If you still itemize, one piece of good news is that starting in 2018, there are no longer income limitations as to who can itemize. Those taxpayers who want to give more of their income to qualified charities are in luck. The cap on charitable contributions as a percentage of adjusted gross income increased from 50% to 60%.

The Alternative Minimum Tax exemption increased from $84,500 to $109,400 for married taxpayers filing jointly and from $54,300 to $70,300 for single taxpayers. The exemptions also phase out at much higher numbers than before.

MORE GOOD NEWS

One final huge plus for those with significant assets is the doubling of the federal estate tax exemption to $22.4 million for couples and $11.2 million for individuals. While on the subject of estates, also remember that the annual gift tax exemption per person rose from $14,000 in 2017 to $15,000 this year, indexed for inflation. Talk to your tax professional to learn more.

One of the highlights of the Tax Cuts and Jobs Act of 2017 is the new treatment of pass through income.

What is Pass Through Income Tax?

Pass-through income is business income that is “passed through” and taxed at a taxpayer’s individual income tax rate. This contrasts with the treatment of a business structured as a C corporation, whose income is taxed at a corporate tax rate.

WHAT’S NEW?

New federal law now allows taxpayers to deduct a portion of pass-through business income on their tax returns. Joint filers with income up to $315,000 (and single filers up to $157,500) can deduct 20% of this type of taxable income starting in 2018. The deduction is more complicated for tax filers above that threshold, because it’s limited to the greater of 50% of the business’s W-2 wages or another calculation that includes the cost of acquired property — or 20% of their business income, if that’s less. The deduction phases out between $315,000 and $415,000.

WHO GETS IT?

Any sole entrepreneurship or business structured as a limited liability company (LLC), partnership or S corporation.

BY THE WAY

The tax savings this pass-through provision offers taxpayers won’t necessarily apply to state taxes, which may continue to use different formulas to determine your state tax liability.

How do you determine the value of your business?

If you had to sell your business today, would you know how much it is worth? Would you know how much your business is worth if you needed a loan? How about the value of your business so you can take on a partner?

Talk to the Experts

Understanding the dollar value of a company is crucial to business owners, who may have an outsized portion of total wealth tied up in their companies. But the process can seem daunting to the uninitiated. Begin by talking to a tax professional who is experienced in this area, or consider hiring a valuation expert with credentials from the American Society of Appraisers, the Institute of Business Appraisers or the National Association of Certified Valuators and Analysts.

Tangibly Speaking

While there are a variety of valuation approaches, they all quantify tangible assets. This is basically a company’s net worth, which includes ownership of physical assets such as machinery, equipment and work space. As with personal net worth, you would also subtract liabilities, including outstanding loan balances and depreciation.

Intangible Assets

While calculating the value of tangible assets is relatively straightforward, determining the value of intangible assets might take more doing. Intangible assets include things like copyrights, patents, licensing, franchise agreements, and goodwill and are important when valuing your business.

Goodwill

Ultimately, reputation can make or break a company’s long-term prospects, and goodwill includes the components that affect that reputation. Goodwill includes your company’s standing among customers and peer firms. It can include the quality and experience of your workforce and relationships with suppliers.

Establishing Value

Add both tangible and intangible assets to your firm’s balance sheet, which lenders, partners and future buyers may use to determine its value. It can show you areas like inventory purchases where you can increase value, or it can identify areas such as liquidity ratios that might detract from value. Talk to us to learn more.

Got Tax Questions?

The new federal tax law changes have a lot of people and business owners asking, “How will this impact me?” To answer those questions and more, Hedley & Co is hosting two in person seminars to cover the changes in the Federal Tax Law. Please join us at one of the events listed. You can register by filling out the form below. If you are an existing client, there is no charge for the event, otherwise there is a $30 fee.

The Tax Cut and Jobs Act of 2017 will likely make 2018 the Year of the Divorce.

Anyone who has been contemplating divorce may be pushed to carry it out because of the
incentive created in the latest tax reform act.

For 75 years, the tax law allowed alimony (spousal maintenance) payments to be
deducted from the payor’s taxable income. However, the new tax law will no longer
allow the payor to deduct alimony payments nor require the payee to include alimony
received as taxable income. This change will be effective for divorce agreements
executed or modified after December 31, 2018.

Impact on Alimony

Unfortunately, alimony currently is a great tool in negotiating the final details of a
divorce and without the tax incentive, many divorce experts fear negotiations will be
more difficult and the payee spouse will receive less money because more will be going
to taxes.

As an example, assume alimony is set at $36,000/year and the payor spouse is in a higher
33% tax bracket and the payee spouse is in a lower 15% tax bracket. The payor would
have a tax deduction of $11,880 and the payor would pay tax of just $5,400 on the same
income. Between the two spouses, they save $6,480 in taxes and the payor spouse
received a tax benefit to make the payments more affordable and the payee spouse, who
actually received the money, would pay taxes on it. With the new tax law, the higher-
income spouse will have to not only pay $36,000 to the other spouse but, will have to pay
taxes of $11,880 on the $36,000 as well. Or, if the payor is only willing to pay the after-
tax equivalent the payment will be $24,120 while the payee spouse would expect the
same after-tax payment under the prior law of $30,600 per year.

Impact on Child Support

In addition, some states like New York, take alimony into effect when calculating child
support. Child support calculations currently take into account the combined net incomes
of both parties. Since the alimony payor’s net income will go down and the payee’s net
income will go up, the amount of child support received will go down if states do not
modify their formulas for child support.

Also, current prenuptial agreements may have assumed a tax deduction for alimony
payments which may have unintended consequences if not modified before December 31,
2018.

We have all heard of the marriage tax penalty but after 2018 there will certainly be a
divorce tax penalty as well.